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Humana splits its business into two segments in anticipation of a decline in earnings after the sale of a kind hospice

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Humana Inc. (NYSE: HUM) expects revenue to decline $ 400 million shortly after the sale of the Kindred at Home hospice segment, which is expected to be offset by lower operating costs and the sale price. doing.

In April, the company signed a final agreement to sell a 60% stake in Kindred to private equity firms Clayton, Dubilier & Rice (CDR). Humana holds the remaining 40%. The sale is expected to close in the third quarter of this year and will impact Humana’s overall earnings, executives said in a second-quarter earnings call.

According to Diamond, some of the lost revenue will be partially offset by the growth of the company’s other healthcare products, such as pharmaceutical services.

Despite the initial loss, the sale promises next year’s margin in terms of debt and operating costs, according to Humana CFO Susan Diamond.

“Of the known headwinds, the expected sale of hospice has always been considered in our thinking in 2023,” Diamond said in a statement. “The hospice business has an operating expense ratio that is higher than the company’s consolidated operating expense ratio. From a capital development perspective, we are using the proceeds from the sale of Kindred hospice to eliminate leverage, so we have debt to equity at the end of the year. The ratio is expected to be in the early 40s. ”

The sale will reduce the ratio of operating costs that Humana spends to generate revenue by an estimated 13% to 13.5%, Diamond said. Previous estimates showed that this number was between 13.2% and 14.2%.

Humana said in its second-quarter earnings report that Kindred at Home’s hospice business is expanding compared to the company’s other business lines. Hospice operations increased operating costs in the second quarter of 2022 by approximately 220 basis points and overall operating costs over the past year by 210 basis points.

Humana has indicated that it will receive approximately $ 2.8 billion in cash payments upon closing of the Kindred Hospice transaction. Most of those funds go to debt repayment.

Humana’s revenue fell to $ 22.2 billion in the second quarter, compared to $ 23.9 billion in the first quarter. The Healthcare Services segment contributed $ 8.9 billion, up from $ 7.5 billion in the year-ago quarter. This segment includes providers, pharmaceuticals, home services and more.

According to Diamond, Humana’s overall healthcare service line performance in the second quarter was driven primarily by lower-than-expected trends in healthcare costs and the Medicare Advantage business.

Humana is one of the largest payers participating in a value-based insurance design (VBID) demonstration at the Medicare and Medicaid Service Center (CMS) in the United States. This demonstration, also known as the Medicare Hospice Curve-in, tests the coverage of these services through Medicare Advantage. Humana operates more participatory health insurance than any other payer.

In its earnings announcement, Humana President and CEO Bruce Brusard announced that the company is undergoing a restructuring through a split into two segments. One segment includes the provision of insurance services. The other consists of medical services, including CenterWell branded medical services. After the 100% acquisition of Kindred, Humana began migrating home health services this year under the umbrella of CenterWell.

Broussard called segmentation a “flywheel” and created opportunities for both value-based payments and service delivery.

“Our ability to integrate and expand the Medicare side of our business is at the heart of what is more formally created by CenterWell’s services side,” Broussard said at a financial results briefing. “While on the insurance side [we’re] We will continue to leverage efficiency across various insurance platforms. [With] Segmentation provides a great opportunity to create simplifications and features to take advantage of the different areas within the insurance area. “

CenterWell covers the services of Humana’s home health care, pharmacies and specialty pharmacies. CenterWell also includes Primary Care Senior Services as a result of a joint venture partnership with private equity firms Welsh, Carson and Anderson & Stowe (WCAS).

A second recently formed JV partnership between Humana’s Center Well and WCAS aimed at expanding access to value-based care for Medicare patients. Through its second JV, Humana plans to roll up to $ 1.2 billion over the next two years to develop approximately 100 de novo senior primary care clinics.

“Currently, much work has been done to actually integrate the service center into one service center and make the clinical program available not only on the Medicare side, but also in our commercial books in a more integrated way. “It’s been done,” continues Broussard. .. “I found that working in the local market allowed me to integrate different healthcare services.”

Segmentation is the latest strategic move in Humana’s goal of increasing corporate value by $ 1 billion.

According to Diamond, Humana is in the “right position” to reach its $ 1 billion value creation goal. This initiative will allow the company to invest more in Medicare Advantage products in 2023, with potential for expanded healthcare service capabilities and long-term growth.

For now, Humana will continue to consider building partnerships with providers who “want to move to value-based care,” Broussard said. He continued that provider quality scores are a top priority in value-based contract considerations.

“It’s really useless if they don’t actually perform both health consequences and star risk adjustments,” Broussard said.